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Online Payday Loans vs. Credit Cards: What You Need To Know

14Jun2017

Torn between extending your credit line or applying for online payday loans? In this post, we’re breaking down what you need to know to make the best choice.

Sometimes life has circumstances you can’t be prepared for: you get in a car accident, your house is damaged in a storm, your paycheck was less than you expected, you receive an unexpected bill, or you lose your job.

In circumstances like these, many people turn to loans to help them get back on their feet. Two of the most commonly considered types of loans are online payday loans and credit card cash advances.

In this article, we’ll discuss the major differences in how the two work, their respective pros and cons, and how to choose which one may be right for you.

Interested? Read on!

Online Payday Loans

How They Work

Online payday loans are common (more than one million people take them out every year) and relatively small short-term loans you can take out through a lender online.

Typically they are between $500 and $1,000. The reason they are limited to this size is that they are intended only to cover the lender until their next paycheck, hence the name “payday”.

For more information on how and when online payday loans work, check out our page here.

Pros Compared to Credit Cards

The biggest advantage that online payday loans offer in comparison to credit cards is the speed with which they can be acquired.

While the average credit card takes a minimum of 14 days to apply and be accepted for, online payday loans can be received on the same day they are applied for, online or over the phone.

Additionally, online payday loans typically have a less demanding acceptance process. This means that a borrower with a bad or minimal credit history is more likely to be accepted for an online payday loan than a credit card.

Cons Compared to Credit Cards

Unfortunately, because online payday lenders have a greater chance of not getting paid back by being more open with their acceptance process, they assume more risk in lending their money. They overcome this risk by charging higher interest rates.

Unlike credit cards, online payday loans also often come with hidden fees. It’s estimated that only around 30% of payday loan companies disclose the actual interest rate they charge to their customers.

Instead, they report on fees that can be charged again on the occasion of payment failure, resulting in an APR of more than 2,000%. Compare this to credit cards, who generally have annual interest rates of less than 60%, and most often between 10 and 20%.

Credit Cards

How They Work

Credit cards represent a line of credit that is ongoing until you hit your credit card limit, at which point you must either extend your limit or pay back some of or all of your balance.

Pros Compared to Online Payday Loans

Credit cards are generally more upfront with their fees and rates than online payday loans.

They also offer, as an incentive to spend and repay, many cash-back and points initiatives.

Additionally, as mentioned above, the annual rate for credit cards are generally much, much lower than online payday loans.

Cons Compared to Payday Loans

When using a cash advance on a credit card, your interest rate will generally be higher than that of the interest rate used for your general purchases.

Most cards will use your payments to pay off your lower-interest debt first.

This means that if you have credit card debt already (as 35% of credit card users do), your payments can go first to this debt, and allow the cash advance debt to amass incredible interest.

If this is the case, an online payday loan may actually have the potential to accrue less interest for you. Always check your contract to understand the specifics as they pertain to you.

Credit cards can also sometimes carry fees that are not always applicable to online payday loans, such as application fees, balance transfer fees, and charges having to do with your credit limit.

Questions to Consider

What Does my Credit Score Look Like?

Any company looking to lend you money is going to check your credit score, but online payday loans are generally more forgiving of a shady credit history than credit card companies.

In fact, many payday loan companies will work with individuals who have no credit at all.

How Soon Do You Need to Get the Money?

Credit cards generally take two weeks to apply for and receive. Online payday loans can be received within the same day as the application, depending on the company and your history.

However, if you already have a credit card, cash advances can be equally swift.

What Is the Amount of Money You Need?

Online payday loans generally have limits of generally $1,000. Credit limits, especially the amount allotted for cash advances, are usually lower than this amount.

The Bottom Line

Generally, online payday loans are set up to be borrowed quickly and paid in the space of less than a month, to avoid the growth of debt under very high-interest rates.

They work best for exceptions, such as unexpected bills or happenstances. They are the best option if you are looking to take out and repay a loan quickly.

Credit card cash lines have smaller limits, but also smaller interest rates, and clearer fees. They have the opportunity to grow unhealthily, but generally are a better idea if you do not believe you’ll be able to pay off your loan when it is due.

They are the answer if you are looking for a longer-term loan option or want to build your credit score.

Your best course of action is always the same, regardless of your situation: research, research, research! Read your contract, understand your obligations, your budget, and what various lenders may require of you before you make any decisions.